Rule No. 23: Beware of Wall Street Hype

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They don't realize that balls can stay in the air much longer than they should. They don't understand that analysts and firms get behind stocks -- sometimes irrationally, sometimes greedily -- and they can keep the stocks propelled in an up direction well beyond reason.

That's why I say,

Never underestimate the Wall Street promotion machine.

Consider American International Group ( AIG) and Fannie Mae ( FNM). Here are two companies with extensive banking opportunities dangling from one side and good track records hanging from the other. These have been two lovey blankets for the sell side for so long that they won't give them up. Both stocks stayed up far too long, even in the post-Spitzer era, because the analysts viewed it as their job to keep the stocks up.

Now, I don't mind admitting that things are better now than they used to be. I own Cabela's ( CAB), and the analysts who brought it public have bent over backward not to recommend the stock, to the point that I miss the promotion machine.

Analysts now have some degree of conscience and are able to separate themselves from being flunkies for banking. But that doesn't mean they won't fall in love with some stocks and do everything they can to praise them long after they shouldn't. It tends to happen particularly to winners, stocks like the online education companies or the biotechs or some of the doggier software companies. The hope never ends. The hype never ends. Not until the cracks are so obvious that it is too late to get out.

In particular, when you short a stock remember that an analyst will twist any data point into a positive to get a stock juiced. Again, that's his job. Don't think badly of him; just be ready to reload when he does it.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict."

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